Should Landlords be Licensed?

Denver says yes.

In early May, the city of Denver passed a law that requires all long term rentals to be licensed.

The justification is that it will improve professionalism and hold landlords to a higher standard. Specifically, City Counsel President Stacie Gilmore is quoted as saying, “This policy will help stabilize housing and neighborhoods.”

Lofty goals, for sure, and they may well be achieved with help from this policy.

What seems to have been much less examined is the fact that any licensing system brings costs in addition to the potential benefits.

Licencing fees ($50/unit for small properties, as little as $2/unit for large properties) are not huge, but are just a part of the cost. There will also be periodic inspections, which will likely cost between $300 and $1,000.

In a market like Denver with average rents of about $1,700, that $350-$1,050 cost is a material increase to the cost of doing business, not to mention a significant additional compliance activity.

How will this change the Denver rental market? What impacts — good or bad — will this have on the Denver rental market?

The Analogue

Happily for us, licensing systems are very well studied and have been a hot topic of debate in academic and policy circles for many years. Research is widely available from organizations like Brookings, Columbia University and the Bureau of Labor Statistics.

In the U.S., there are many professional licensing systems, and almost all of them accomplish a few goals:

1. Licensing sets professional standards. This is a core justification for licensing — to ensure a baseline level of skill, professionalism and safety within a profession (cab drivers, beauticians, realtors, etc.).
2. Licensing increases income for those who are licensed. In most places, this means that individuals who are licensed earn more than they would without licensing.
3. Licensing keeps new entrants out. By creating a barrier to entry, licensing reduces the supply of professionals in that profession.
4. Licensing increases costs to consumers. By creating a barrier to entry and reducing supply of a given profession, licensing reduces availability and increases costs.

Does This Translate for Landlords?

The licensing program in Denver has many similar characteristics to these standard labor market licensing regimes.

First, it imposes new regulations with which all landlords must comply in order to serve renters. Second, it imposes new direct costs on those landlords. Third, it imposes penalties for non-compliance.

While a ~$1,000 cost and a series of logistical and regulatory steps falls far short of the 1,600 hours of training that is necessary to be a licensed cosmetologist in New Mexico, they do still increase the cost and regulatory burden in a material way, which is the core characteristic of licensing systems in analogous sectors.

Aren’t Landlords Different from Cosmetologists?

Stop for a moment and picture the prototypical landlord…

Am I right?

The reality is quite different. In the U.S., more than 70% of rental properties are owned by individual owners — people who own four or fewer rental properties, and most own only one. These folks might have inherited a property, have saved to be able to buy a second property after paying off the mortgage on their first property, or, increasingly, have built a second unit on their existing property.

More affluent than the renters living in their places, for sure, but not rolling in cash. Their business is one of nickels and dimes and every penny that goes into a property comes out of their pockets, so they feel any additional cost keenly.

Further, many of the rental units available are rented out only opportunistically. For example, a parent passes away and the children rent out the property until they make a decision about what to do with it. Or, an income interruption makes renting out an in-law unit more attractive than it may have been before, so the owner starts renting it out and doesn’t stop when the main source of income returns.

Note the structure of the Denver program. Higher per-unit costs for small properties, though understandably driven by higher per unit monitoring costs, are a penalty on smaller landlords. Also, the burden of overseeing the inspections and making sure the right paperwork is filed is one thing if you have a professional, full time property manager, but another if you’re trying to take care of things on evenings and weekends, as is the case for most landlords.

All of this combines to increase the costs most on those landlords least able to bear it without increasing rents — and most likely to choose not to rent their place out anymore.

What’s a landlord to do?

Add an additional cost and a regulatory burden into this market with its thin margins and what’s the likely effect?

Landlords are likely to pass on the new expenses to the renters, and some may no longer rent out their places — particularly many of those “opportunistic landlords” — further driving costs up for renters in two ways.

One, by directly increasing the cost of landlording. Two, by reducing the supply of available rentals, while demand stays the same.

So, extra costs for renters are likely. How much extra cost? Will all the extra costs flow to renters or will landlords bear some share? Will the contraction in supply increase costs to renters even above the further costs to landlords?

Licensing Does Have Merit

Landlording is a tough business. Pipes burst on New Year’s Eve and you have to figure out how to deal with it. When a unit vacates, it’s a ton of work to find the new resident and get the place ready for them to move in. Staying legal is complicated and already beyond the reach of many small landlords.

Whether they know it or not, landlords have taken on a huge responsibility when they provide a home. It’s not a standard commercial relationship. They’re not selling someone shoes or a coffee.

The landlord provides a roof over the renter’s head, safety and security in a complex world, and the place where the renter will experience a rich life, full of joy and tears, comfort and crisis. They might meet their true love or see their child take its first steps in that home.

That’s real responsibility.

If a licensing regime truly does ensure that landlords are more professional and renters have a better shot at a great experience, that’s definitely worth something.

But, how much? Denver’s going to help us find out. All of us here at Dwellsy will be watching to see what happens.